It’s Legal: Some New York Landlords Can Take Tax Breaks Then Raise Rents Without Limit

A state Supreme Court judge quashed the complaints of a New York City tenant this week, ruling that landlords in downtown Manhattan who received tax breaks to convert aging office buildings into apartments can be exempt from limits on rent increases.

Joel Roodman, a tenant at 85 John Street, was sued by his landlord, Kibel Companies, in 2015 after Roodman objected to a 31-percent rent increase, which put his rent at $9,500 per month. Roodman argued his apartment should be subject to rent stabilization because of the tax break Kibel was receiving that year.

A lawyer for Roodman said he was considering an appeal. There have been two other court rulings on how to apply the tax break, which have reached opposite conclusions.

The tax break, known as 421-g, was created in the 1990s by the state legislature with the strong support of then-Mayor Rudy Giuliani. The legislation required that apartments built with help from the tax break should be rent-stabilized. At the time, the posh historic office buildings of the financial district faced high vacancies as corporate tenants moved to more modern buildings in midtown. The tax break helped revitalize the neighborhood, spurring the creation of some 10,000 units. But the vast majority of them were never subject to rent stabilization, despite the specific language included in the law.

ProPublica examined the history of 421-g and found that Giuliani, then-Senate Majority Leader Joseph Bruno and the real-estate industry moved behind the scenes after the Assembly passed the bill — but before it was voted on by the Senate — to exempt apartments renting for more than $2,000 a month from rent stabilization. They did this without rewriting the language of the bill approved by the Assembly. Instead, Giuliani and Bruno exchanged letters declaring their intent to exempt the pricier apartment units. The letters were read into the Senate record but were never seen by the Assembly.

“This was really an attempt to undermine the democratic process, which is really poor in New York as it is,” Eric Lane, dean of the Hofstra School of Law, told ProPublica last year. “Let me assure you that these shenanigans were ways to create a legislative record without going back and amending the bill.”

Giuliani submitted testimony on behalf of the building’s owner. Marc Mukasey, a spokesperson for Giuliani, declined to comment when contacted by ProPublica last year.

In his decision, Supreme Court Judge Schlomo Hagler said there was “clear legislative intent” to exempt apartments renting for more than $2,000 a month from rent stabilization. He pointed to the Senate debate — noting there was no Assembly debate at all — and wrote that no senator objected to the content of the Giuliani-Bruno letters. Only one senator, Franz Leichter, opposed the bill, which passed 53-1.

New York’s Legislature wanted to give tax breaks in Lower Manhattan in exchange for limits on rent increases. The mayor and the real estate lobby had another idea. Read the story.

“Notwithstanding Senator Leichter’s vigorous opposition, the Legislature rejected his position and overwhelmingly voted to provide the generous tax abatements to owners to encourage the development of Lower Manhattan,” Hagler wrote. “As such, it appears that the main purpose of the Plan was to stimulate economic development, and not to primarily establish rent regulation for luxury housing.”

Joseph Burden, a lawyer for Kibel, said the decision was “comprehensive, well-reasoned and grounded upon an in-depth statutory analysis, thorough examination of legislative intent, and prior case law.”

Serge Joseph, a lawyer for Roodman, said the issue is far from decided, noting that as many as four other cases have been filed and are still pending on the 421-g question.

As mayor, Giuliani also signed a City Council bill in 1994 — a year before the 421-g bill — allowing for hundreds of thousands of apartments to exit rent regulation if their rents topped $2,000 a month. Three years later, the state legislature adopted the Council bill, stripping the city of the possibility of repealing it. Since then, 250,000 apartments that were once stabilized have become free-market units, ProPublica found.

Update, July 5, 2017: On July 3, New York Supreme Court Justice Carol Edmead issued a ruling in another case involving a building receiving the 421-g tax break, 50 Murray Street in Tribeca. Edmead decided apartments in the building will now become subject to rent stabilization no matter how high their rents rise.

The new ruling is diametrically opposed to a previous Supreme Court decision on the same question involving a different building. Joseph Burden, who represented Clipper Equities, the landlord in Tribeca, sent Edmead the earlier decision and urged her to rule in the same way. “The court declines to do so,” Edmead wrote in her opinion, before laying out a complex procedure for how 50 Murray Street tenants should be reimbursed for overcharges.

“It’s an amazing finding,” said attorney Serge Joseph, who represented over 40 tenants in the building. “We are thrilled that she found that the apartments were regulated and that she also established a formula [for reimbursements] going forward.”

Burden said Clipper Equities would appeal the decision. “We respectfully believe Justice Edmead has overlooked substantial evidence and clear legislative history in reaching her decision,” he said.

At least two more cases are pending in New York Supreme Court regarding the question of whether 421-g apartments should be subject to rent stabilization, Joseph said.

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